Quest Diagnostics 2015 Annual Report Download - page 112

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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(in millions unless otherwise indicated)
F- 37
designated by the Board of Directors but in no event more than ten years from date of grant, and generally become exercisable
in three equal annual installments beginning on the first anniversary date of the grant of the option regardless of whether the
optionee remains a director of the Company. The maximum number of shares that may be issued under the DLTIP is 2.4
million shares. For the years ended December 31, 2015, 2014 and 2013, grants under the DLTIP totaled 31 thousand shares, 32
thousand shares and 75 thousand shares, respectively.
The Company's practice has been to issue shares related to its stock-based compensation program from shares of its
common stock held in treasury or by issuing new shares of its common stock. See Note 15 for further information regarding
the Company's share repurchase program.
Beginning in 2015, the Company changed its method for estimating the fair value of its stock option awards from a
lattice-based option-valuation method to a Black-Scholes option-valuation model which has been applied prospectively to stock
option awards. The change did not have a significant effect on the stock-based compensation expense reported in the
consolidated statements of operations for the year ended December 31, 2015, because stock option awards are granted based on
a prescribed dollar value.
The expected volatility under the Black-Scholes option-valuation model was based on historical volatilities of the
Company's common stock. The dividend yield was based on the approved annual dividend rate in effect and current market
price of the underlying common stock at the time of grant. The risk-free interest rate was based on the U.S. Treasury yield
curve in effect at the time of grant for bonds with maturities consistent with the expected holding period of the related award.
The expected holding period was estimated using the historical exercise behavior of employees.
The weighted average assumptions used in valuing stock options granted in the periods presented were:
2015 2014 2013
Fair value at grant date $11.57 $10.99 $12.64
Expected volatility 21.0% 25.1% 25.8%
Dividend yield 2.1% 2.1% 1.4%
Risk-free interest rate 1.7% 1.6% - 2.0% 1.1% - 1.3%
Expected holding period, in years 5.3 5.5 - 6.6 5.5 - 6.7
The fair value of restricted stock awards, restricted stock units and performance share units is the average market price
of the Company's common stock at the date of grant.
The following summarizes the activity relative to stock option awards for 2015:
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
Options outstanding, beginning of year 6.6 $ 54.46
Options granted 2.5 71.14
Options exercised (1.1) 53.79
Options forfeited and canceled (0.3) 61.99
Options outstanding, end of year 7.7 $ 59.65 7.3 $ 89
Exercisable, end of year 3.5 $ 55.37 5.8 $ 56
Vested and expected to vest, end of year 7.5 $ 59.43 7.3 $ 88
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the
Company's closing common stock price on the last trading day of 2015 and the exercise price, multiplied by the number of in-
the-money options) that would have been received by the option holders had all option holders exercised their options on
QUEST DIAGNOSTICS 2015 ANNUAL REPORT ON FORM 10-K